Rodger Nisbet believes that surging overseas markets are disregarding weak fundamentals and are vulnerable to another downturn.
"Equity markets typically magnify the emotions of the wealth effect of booms and busts. The last 12 months have been no exception to that," says Nisbet, 43, manager of the $50-millionRenaissance International Equity and a director of Walter Scott & Partners Ltd., in Edinburgh, Scotland.
"History tells us that dramatic falls are followed by dramatic rises. That's what we've got," adds Nisbet. "The important thing is the extent to which this (rebound) has the necessary foundation of earnings growth. That's questionable, because the outlook for earnings is poor."
Working within a team of 25 analysts and managers that oversees about US$30 billion in global assets, Nisbet is highly selective in building an equity portfolio. "Value comes not from markets per se, but from companies that comprise the market," he says. "If our objective is to achieve a (long-term, net of inflation) seven to 10% rate of return, we must invest in businesses that are capable of generating wealth at that rate."
Companies must meet three criteria to merit investment: the ability to generate a minimum 20% free cash flow; the ability to earn 20% return on equity; and the ability to generate earnings per share growth of 20%. There are about 50 names in Renaissance International Equity, and a similar number in the $51-millionRenaissance Global Growth.
The team shuns indices, and its asset allocations do not reflect benchmark geographic weightings such as those of the Europe Australasia Far East (EAFE) index. Single holdings are limited to about 5% of fund assets. Portfolio turnover has been very low, at 13% in 2008, for Renaissance International Equity.
Buying businesses with strong fundamentals is the name of the game for Nisbet. "We're not trying to make a guess 10 years out, based on a discounted cash-flow analysis. What we are doing is recognizing a great business, and deciding whether or not past is prologue for the future. Then it's a question of how much you pay," he says. "We're GARP (growth at a reasonable price) investors, but have been flippantly described as growth-at-a-Scottish-price investors."
One long-time holding in Renaissance International Equity is Woodside Petroleum Ltd., a leading Australian oil and gas exploration firm. Woodside operates a large natural gas project on the northwest coast of that country and has been expanding its delivery of liquefied natural gas throughout Asia.
"It's never raised a cent of debt, or equity, in 20 years, and has compounded its earnings per share well in excess of 20% for 20 years," says Nisbet. "The compound return to shareholders, including reinvested dividends, is in excess of 20%."
A native of Edinburgh, who spent some time in Sri Lanka where his father worked for the United Nations, Nisbet is a 16-year investment industry veteran. First, however, he had a brief career in industrial design and architecture.
After graduating in 1990 from the University of Dundee with a bachelor of arts in environmental design, and working on his own, he switched careers in August 1993. "I wanted to get back to Asia, where I had partly grown up," says Nisbet. "The investment management community in Edinburgh offered a chance to do that."
Initially, Nisbet served an apprenticeship at Walter Scott, a firm that prefers to train its staff from the ground up. Within 10 years he became a director of the company. In 2004, Nisbet assumed management of the two Renaissance funds. Over three- and five-year periods ended Aug. 31, both funds have produced top-quartile performance.
However, the funds have not fully captured the recent rally. For instance, Renaissance International Equity returned 15.2% for the six months ended Aug. 31, versus 26.1% for the median fund in its category. Nisbet attributes that partly to the fact the fund favoured areas such as pharmaceuticals and had little exposure to banks.
"Our analysis and need for transparency in accounting has led us to other businesses. We would rather own Nestlé SA than Royal Bank of Scotland with its off-balance sheet liabilities. The opaque nature of the banks' accounting has kept us away."
Nisbet meets three times a week with analysts to monitor existing holdings and pore over new ideas. Typically, only about six new names are accepted each year. "We are very selective."
One relatively new holding is Wal-Mart Stores Inc. ( WMT/NYSE), which is in Renaissance Global Growth. "It's a great business, very profitable and well managed," says Nisbet. Once a high-flying stock, Wal-Mart saw its price-earnings multiple fall to about 12 when Nisbet's team acquired the stock in mid-2007.
"This speaks to the compression in earnings multiples we've seen world-wide," Nisbet says. "Some truly great growth businesses are being offered for sale. There's been a half-price sale for the last 18 months."
